SEC probes whether PIMCO ETF inflated bonds' value

Federal investigators are looking at how PIMCO's flagship exchange traded fund, PIMCO Total Return, bought some bonds at discounted prices then valued them differently, according to a Wall Street Journal report.

Jim Young/Reuters/File

Bill Gross, co-founder and co-chief investment officer of Pacific Investment Management Company (PIMCO), arrives to speak at an investment conference in June in Chicago. The Securities and Exchange Commission is investigating whether Pimco inflated the returns of its Total Return Exchange-Traded Fund run by Mr. Gross.

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September 25, 2014

By CNBC

U.S. regulators are investigating whether the way bond giant Pacific Investment Management Co. values its bond holdings may artificially boost returns of one of its largest funds, according to The Wall Street Journal, citing unidentified close to the matter.

How the $3.6 billion Pimco Total Return exchange traded fund bought some bonds at discounted prices and then relied on higher valuations for the assets when calculating the holdings' value is among the issues being probed by the Securities and Exchange Commission, the report said.

This could create the appearance of quick price gains, and the SEC may be focusing on whether investors are getting a misleading picture of the fund's performance, the report added.

A spokesperson at Pimco, which manages nearly $2 trillion, told the newspaper that the fund manager has been cooperating with regulators.

"We believe our pricing procedures are entirely appropriate and in keeping with industry best practices," the spokesperson said, while an SEC spokesperson declined to comment, according to the report.

The article noted that it isn't clear whether Pimco's actions would be considered improper or how widespread this sort of valuation maneuver is among other bond managers.

The report notes that the assets in question were purchased after the ETF's launch in February 2012. In early March 2012, 10-year U.S. Treasury yields, which move inversely to prices, climbed sharply to highs around 2.40 percent, before dropping sharply to as low as around 1.40 percent over the next couple months. The moves suggest any credit assets Pimco purchased around that time may have also experienced sharp market-based changes in valuation. (Read More Would have done 'things differently': El-Erian)

News of the investigation comes as Pimco's Total Return Fund, the world's largest bond fund and managed by storied bond guru Bill Gross, had net outflows of $830 million in July, marking its 15th straight month of outflows, according to Morningstar.

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Gross has faced additional scrutiny after media reports indicated the departure earlier this year of Mohamed El-Erian as co-CEO, was acrimonious.

Gross has also been outspoken about the way the financial system exacerbates income inequality, telling the Monitor in January:

"We're not just experiencing a new Gilded Age, but a Bitcoin Age," says Mr. Gross, referring to the digital currency. "Artificial money, corporate K Street, and Wall Street interests are producing one world for the rich and an entirely different world for the working class," says the founder and co-chief investment officer of PIMCO in Newport Beach, Calif.

"It can't go on like this, either from the standpoint of the health of the capitalist system itself or the health of individuals and the family," he adds.

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